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Geopolitical risk dashboard
July 2024 | Geopolitical risk is structurally elevated as we begin the second half of the year, in our view. The world is entering the third distinct geopolitical era since World War Two, following the Cold War and post-Cold War eras, and is searching for a new equilibrium – but with continued competition and a significant risk of conflict.
BlackRock Geopolitical Risk Indicator
The global BlackRock Geopolitical Risk Indicator (BGRI) aims to capture overall market attention to geopolitical risks, as the line chart shows. The indicator is a simple average of our top-10 risks.
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Top 10 risks by likelihood
We maintain our three geopolitical themes for the year: deeper fragmentation between competing geopolitical and economic blocs; a more volatile and less predictable world order; and the rewiring of globalization accelerating. Elections remain front and center in 2024. Several — including in France, Mexico and India — sparked volatility. See BlackRock Bulletins on the French and UK results. Going forward, we are focused on the lead-up to the U.S. elections and implications of different scenarios in key areas such as taxes, trade, fiscal spending and regulation.
| Risk | Description | Market attention since 2019 | Likelihood | Our view |
|---|---|---|---|---|
| U.S.-China strategic competition | Tensions escalate meaningfully over Taiwan or in the South China Sea. |  |
High | The U.S.-China relationship has been stable on the surface since the meeting between President Biden and President Xi last November, but we see a new normal of intense competition churning just below the surface. Increased working-level dialogue and senior visits should be seen as a tactical exercise and do not structurally alter the competitive dynamics of the relationship, in our view. Persistent and large-scale exporting of excess industrial capacity by China has become the next wave of tension as the U.S. and others aim to avoid a second “China Shock,” or flood of Chinese imports that dampens domestic manufacturing. The U.S. and its allies, including at the G7, are also focused on allegations that Chinese financial institutions have supported the Russian war effort. Conflict over Taiwan remains a risk over the medium- and long-term and would have a significant global economic impact. Tensions in the South China Sea, particularly between the Philippines and China, have significantly increased and pose a meaningful risk of miscalculation or accident. |
| Global technology decoupling | Technology decoupling between the U.S. and China significantly accelerates in scale and scope. |  |
High | The U.S. and China are engaged in a long-term, zero-sum technological competition that is at the center of the U.S.-China relationship. They are pursuing targeted decoupling, focused especially on advanced technologies like AI, semiconductors, and quantum computing, as well as technologies with military application. In May, the U.S. hiked tariffs on Chinese electric vehicles, and in July Europe implemented its own provisional tariffs. The U.S. has launched investigations into frontier tech, sensitive bulk data, digitally connected vehicles, crane technology and biotech. It is also preparing to implement the first-ever outbound investment restrictions focused on key technologies, especially semiconductors and AI. We are watching for potential further action across a range of technoeconomic measures. China has responded to date by investing in its own capabilities and objective of self-reliance. It is considering retaliatory economic actions, particularly against Europe. We expect ongoing tension and the development of parallel, competing tech stacks as a result. |
| Russia-NATO conflict | The war in Ukraine becomes protracted, raising the risk of escalation beyond Ukraine. |  |
High | Russia’s invasion of Ukraine is the largest, most dangerous military conflict in Europe since World War Two. The conflict has become a battle between the two sides’ industrial bases, and Ukraine remains in a vulnerable position. Recently approved additional military aid from the U.S. will likely allow Ukraine to stabilize its situation and materially improve its defenses this year, pointing to a continued war of attrition. The G7 recently acted to free up additional support using the earnings on frozen Russian central bank assets. Russia is receiving significant military support from Iran and North Korea as well as major financial backing and dual-use items from China. We see a ceasefire or diplomatic solution as unlikely in the near-term with the conflict likely to continue into next year. |
| Gulf tensions | Regional conflict escalates, threatening energy infrastructure and increasing volatility. |  |
High | From the perspective of the markets and the global economy, the situation in Gaza remains fairly contained – although the resulting humanitarian crisis is catastrophic. However, there is still no agreement for a ceasefire in exchange for hostages, nor any plan to prepare for post-war governance and security in Gaza. Israeli military operations in Gaza are likely to persist into next year as conflict with Hezbollah continues to escalate and displace citizens on both sides of the border. Elsewhere, Iran-backed militants in Lebanon, Syria, Iraq and Yemen continue to threaten Israeli and Western assets, including U.S. troops and commercial shipping vessels. The fundamental conflict in the Middle East is between Israel and the U.S. and Iran, as underscored by the unprecedented and direct Iranian aerial attack on Israel in April. Neither side seeks all-out war. However, Iran has said it would now retaliate directly against Israeli attacks in the region, heightening the risk of accidental – or intentional – escalation. Another potential source of escalation is Iran’s recent steps to accelerate its nuclear capacity. |
| Major terror attack(s) | A terror attack leads to significant loss of life and commercial disruption. |  |
High | The threat of terrorism against U.S. interests is at an extraordinarily high level. U.S. law enforcement and intelligence agencies have cited violent extremists, lone actors and the emergence of new terrorist hotspots as major areas to watch. The U.S. Department of Defense recently issued a rare heightened alert for U.S. military bases and personnel in Europe, and the FBI has warned Congress of terrorists drawing inspiration from events abroad to attack the U.S. Al-Qaida and the Islamic State keep rebuilding their global reach, showing increased motivation and capability to conduct attacks abroad. The Sahel region is of particular concern as military takeovers have threatened the West’s efforts to fight against terrorism. We see heightened risk of terrorism ahead of the 2024 presidential election. |
| Major cyber attack(s) | Cyber attacks cause sustained disruption to critical physical and digital infrastructure. |  |
High | Market attention to cyber attacks jumped near all-time highs earlier this year. Mounting geopolitical competition will likely cause cyber attacks to increase in scope, scale and sophistication, we think. There is emerging evidence state-backed hackers have been infiltrating and pre-positioning malware in critical national infrastructure – with the intent to cause disruption and destruction in the outbreak of future conflict. A recent hack against a cloud storage company could be one of the biggest-ever data breaches and underscores the threat to cloud infrastructure. Surging ransomware attacks, especially in healthcare and critical manufacturing, highlight the vulnerability of business infrastructure. We see cyber activity increasing in conflict zones and particularly around upcoming elections. |
| Emerging markets political crisis | Ripple effects from the Ukraine war severely stress EM political systems and institutions. |  |
Medium | Emerging market (EM) economies have been boosted by central bank rate cuts and resilient developed market (DM) growth. Yet China’s challenged economic activity and the long-term costs of fragmentation present risks to EM. We expect divergence in EM outcomes and are watching a series of important EM elections in 2024 – and the U.S. election in November – as key signposts. While countries like India, Mexico and Vietnam are likely to benefit from supply chain diversification, others with substantial short-term debt obligations like Argentina remain vulnerable despite domestic policy adjustment. We worry about a lack of international cooperation on debt relief and the impact of a record number of global conflicts around the world. |
| North Korea conflict | North Korea pushes ahead with its nuclear buildup and takes provocative actions such as missile launches. |  |
Medium | North Korea is growing notably closer to Russia, to which it has become a top arms supplier. This was underscored by President Vladimir Putin’s June visit to Pyongyang for the first time in two decades. Russia and North Korea signed a strategic partnership agreement and signaled a deeper, more extensive defense relationship. In the meantime, North Korea’s nuclear program continues unabated. We see increased risk of further provocation or even military action as Kim looks to build leverage ahead of the U.S. elections. In January, Kim Jong Un renounced peaceful reunification with South Korea as a key policy goal. In response, South Korea and Japan are bolstering their defenses and strengthening ties with each other and the U.S. |
| Climate policy gridlock | Developed economies fail to increase public investment or take action to achieve net-zero emission targets. |  |
Medium | The world is seeking to deliver on decarbonization commitments and energy security goals as damaging weather and heat-related incidents increase in frequency and magnitude. Clean energy will increasingly become a source of geopolitical competition, we think, benefiting those who can control and access it. In the U.S., the IRA will help accelerate the development and deployment of low-carbon technologies, in our view. Countries may have to choose between cheap clean tech and more protectionist, security-oriented industrial policy. We think this year’s U.S. election represents a pivotal point for the implementation of clean energy legislation. |
| European fragmentation | The energy crunch and inflationary pressures lead to a populist resurgence and economic volatility. |  |
Low | Market attention to European fragmentation has increased sharply since last fall. Europe remains largely united on key issues: increasing European Union (EU) competitiveness, building up its strategic autonomy, and supporting Ukraine. Disagreements are centered on execution and financing. Several issues could strain European cohesion going forward. These include migration, which last year reached the highest levels since 2016, and Europe’s approach to China. Revision of the EU Stability and Growth Pact fiscal rules following their suspension during COVID could also put some individual national governments into conflict with Brussels. Recent EU parliamentary elections saw centrists retain power, with right-wing and anti-establishment parties gaining ground. In the UK, the Labour Party won in a landslide. France’s unprecedented election outcome could lead to a left-wing coalition in parliament. See BlackRock Bulletins on the French and UK results. |
Sources: BlackRock Investment Institute. Data as of July 2024. Notes: The “risks” column lists the 10 key geopolitical risks that we track. The “description” column defines each risk. “Attention score” reflects the BlackRock Geopolitical Risk Indicator (BGRI) for each risk. The BGRI measures the degree of the market’s attention to each risk, as reflected in brokerage reports and financial media. See the "how it works" section on p.7 for details. The table is sorted by the “Likelihood” column which represents our fundamental assessment, based on BlackRock’s subject matter experts, of the probability that each risk will be realized – either low, medium or high – in the near term. The “our view” column represents BlackRock’s most recent view on developments related to each risk. This is not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding any funds or security in particular. Individual portfolio managers for BlackRock may have opinions and/or make investment decisions that may, in certain respects, not be consistent with the information contained herein.
Comparing market movements and attention
We have developed a market movement score for each risk that measures the degree to which asset prices have moved similarly to our risk scenarios, integrating insights from our Risk & Quantitative Analysis (RQA) team and their Market-Driven Scenario (MDS) shocks. We do this by estimating how “similar” the current market environment is to our expectation of what it would look like in the event the particular MDS was realized, also taking into account the magnitude of market moves. The far right of the horizontal axis indicates that the similarity between asset movements and what our MDS assumed is greatest; the middle of the axis means asset prices have shown little relationship to the MDS, and the far left indicates markets have behaved in the opposite way that our MDS anticipated.
Risk map
BlackRock Geopolitical market attention, market movement and likelihood
Selected scenario variables
How to gauge the potential market impact of each of our top-10 risks? We have identified three key “scenario variables” for each – or assets that we believe would be most sensitive to a realization of that risk. The chart below shows the direction of our assumed price impact.
| Geopolitical risk | Asset | Direction of assumed price impact | |
|---|---|---|---|
| U.S.-China strategic competition | Taiwanese dollar |  |
|
| Taiwanese equities | |
||
| China high yield | |
||
| Global technology decoupling | Chinese yuan | |
|
| U.S. investment grade | |
||
| Asia ex-Japan electrical | |
||
| Russia-NATO conflict | Russian equities | |
|
| Russian ruble | |
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| Brent crude oil |  |
||
| Gulf tensions | Brent crude oil | |
|
| VIX volatility index | |
||
| U.S. high yield credit | |
||
| Major terror attack(s) | Germany 10-year government bond | |
|
| Japanese yen | |
||
| Europe airlines sector | |
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| Major cyber attack(s) | U.S. high yield utilities | |
|
| U.S. dollar | |
||
| U.S. utilities sector | |
||
| Emerging markets political crisis | Latin America consumer staples sector | |
|
| Emerging vs. developed equities | |
||
| Brazil debt | |
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| North Korea conflict | Japanese yen | |
|
| South Korean won | |
||
| South Korean equities | |
||
| Climate policy gridlock | U.S. building products sector | |
|
| U.S. construction materials sector | |
||
| U.S. utilities sector | |
||
| European fragmentation | Italy 10-year government debt | |
|
| EMEA hotels and leisure | |
||
| Russian rouble | |
Source: BlackRock Investment Institute, with data from BlackRock’s Aladdin Portfolio Risk Tools application, July 2022. Notes: The table depicts the three assets that we see as key variables for each of our top-10 geopolitical risks – as well as the direction of the assumed shocks for each in the event of the risk materializing. The up arrow indicates a rise in prices (corresponding to a decline in yields for bonds); the down arrow indicates a fall in prices. Our analysis is based on similar historical events and current market conditions such as volatility and cross-asset correlations. See the “implied stress testing framework” section of the 2018 paper Market-Driven Scenarios: An Approach for Plausible Scenario Construction for details. For illustrative purposes only. The scenarios are for illustrative purposes only and do not reflect all possible outcomes as geopolitical risks are ever-evolving. This material represents an assessment of the market environment at a specific time and is not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding any funds, strategy or security in particular.
We detail the key geopolitical events over the next year in the table below.
| 2024 | Location | Event |
|---|---|---|
| July | ||
| July 1 | Hungary | European Council Presidency Begins |
| July 4 | UK | UK elections |
| July 7 | France | French legislative election |
| July 9-11 | NATO | NATO Summit |
| July 15-18 | U.S. | Republican National Convention |
| July26-August 11 | France | Summer Olympics |
| July 18 | Euro Area | European Central Bank Meeting |
| July 24 | Canada | Bank of Canada Meeting |
| July 28 | Venezuela | Presidential elections |
| July 31 | U.S. | Federal Reserve Meeting |
| July 31 | Japan | Bank of Japan Meeting |
| August | ||
| August 1 | UK | Bank of England Meeting |
| August 19-22 | U.S. | Democratic National Convention |
| August 22 | U.S. | Jackson Hole Economic Symposium |
| September | ||
| September 4 | Canada | Bank of Canada Meeting |
| September 10-24 | UN | UN General Assembly |
| September 12 | Euro Area | European Central Bank Meeting |
| September 18 | U.S. | Federal Reserve Meeting |
| September 19 | UK | Bank of England Meeting |
| September 20 | Japan | Bank of Japan Meeting |
| September 26 | Switzerland | Swiss National Bank Meeting |
| October | ||
| October 6-11 | Laos | ASEAN Summits and East Asia Summit |
| October 17 | Euro Area | European Central Bank Meeting |
| October 22-24 | Russia | BRICS Leaders Summit |
| October 23 | Canada | Bank of Canada Meeting |
| October 25-27 | IMF | IMF / World Bank Annual Meetings |
| October 31 | Japan | Bank of Japan Meeting |
| November | ||
| November 5 | U.S. | U.S. elections |
| November 7 | U.S. | Federal Reserve Meeting |
| November 7 | UK | Bank of England Meeting |
| November 11-24 | Azerbaijan | COP29 Climate Conference |
| November 18-19 | Brazil | G20 Leaders’ Summit |
| November TBC | India | Quad (Australia, India, Japan, U.S.) Leaders' Summit |
| December | ||
| December 1 | South Africa | South Africa G20 Presidency begins |
| December 7-8 | Qatar | 2024 Doha Forum |
| December 11 | Canada | Bank of Canada Meeting |
| December 12 | Euro Area | European Central Bank Meeting |
| December 12 | Switzerland | Swiss National Bank Meeting |
| December 18 | U.S. | Federal Reserve Meeting |
| December 19 | UK | Bank of England Meeting |
| December 19 | Japan | Bank of Japan Meeting |
Source: BlackRock Investment Institute, July 2024.
How it works
The quantitative components of our geopolitical risk dashboard incorporate two different measures of risk: the first based on the market attention to risk events, the second on the market movement related to these events.
Market attention
The BlackRock Geopolitical Risk Indicator (BGRI) tracks the relative frequency of brokerage reports (via Refinitiv) and financial news stories (Dow Jones News) associated with specific geopolitical risks. We adjust for whether the sentiment in the text of articles is positive or negative, and then assign a score. This score reflects the level of market attention to each risk versus a 5-year history. We assign a heavier weight to brokerage reports than other media sources since we want to measure the market's attention to any particular risk, not the public’s.
Our updated methodology improves upon traditional “text mining” approaches that search articles for predetermined key words associated with each risk. Instead, we take a big data approach based on machine-learning. Huge advances in computing power now make it possible to use language models based on neural networks. These help us sift through vast data sets to estimate the relevance of every sentence in an article to the geopolitical risks we measure.
How does it work? First we “train” the language model with broad geopolitical content and articles representative of each individual risk we track. The pre-trained language model then focuses on two tasks when trawling though millions of brokerage reports and financial news stories:
- classifying the relevance of each sentence to the individual geopolitical risk to generate an attention score,
- classifying the sentiment of each sentence to produce a sentiment score
The attention and sentiment scores are aggregated to produce a composite geopolitical risk score. A zero score represents the average BGRI level over its history. A score of one means the BGRI level is one standard deviation above its historical average, implying above-average market attention to the risk. We weigh recent readings more heavily in calculating the average. The level of the BGRIs changes slowly over time even if market attention remains constant. This is to reflect the concept that a consistently high level of market attention eventually becomes “normal.”
Our language model helps provide more nuanced analysis of the relevance of a given article than traditional methods would allow. Example: Consider an analyst report with boilerplate language at the end listing a variety of different geopolitical risks. A simple keyword-based approach may suggest the article is more relevant than it really is; our new machine learning approach seeks to do a better job at adjusting for the context of the sentences – and determining their true relevance to the risk at hand.
Market movement
In the market movement measure, we use Market-Driven Scenarios (MDS) associated with each geopolitical risk event as a baseline for how market prices would respond to the realization of the risk event.
Our MDS framework forms the basis for our scenarios and estimates of their potential one-month impact on global assets. The first step is a precise definition of our scenarios – and well-defined catalysts (or escalation triggers) for their occurrence. We then use an econometric framework to translate the various scenario outcomes into plausible shocks to a global set of market indexes and risk factors.
The size of the shocks is calibrated by various techniques, including analysis of historical periods that resemble the risk scenario. Recent historical parallels are assigned greater weight. Some of the scenarios we envision do not have precedents – and many have only imperfect ones. This is why we integrate the views of BlackRock’s experts in geopolitical risk, portfolio management, and Risk and Quantitative Analysis into our framework. See the 2018 paper Market Driven Scenarios: An Approach for Plausible Scenario Construction for details. MDS are for illustrative purposes only and do not reflect all possible outcomes as geopolitical risks are ever-evolving.
We then compile a market movement index for each risk.* This is composed of two parts:
- Similarity: This measures how “similar” the current market environment is to our expectation of what it would look like in the event the particular MDS was realized. We focus on trailing one-month returns of the relevant MDS assets.
- Magnitude: this measures the magnitude of the trailing one-month returns of the relevant MDS assets.
These two measures are combined to create an index that works as follows:
- A value of 1 would means that the market has reacted in an identical way as our MDS indicated. We call this “priced in.”
- A value of zero would indicate that the pattern of asset prices bears no resemblance at all to what the MDS for a particular risk would indicate.
- A value of -1 would indicate that assets are moving in the opposite direction to what the MDS would indicate. Markets are effectively betting against the risk.
*This material represents an assessment of the market environment at a specific time and is not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding any funds, strategy or security in particular. The scenarios are for illustrative purposes only and do not reflect all possible outcomes as geopolitical risks are ever-evolving.
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